Quick Note on Tax Incentive Plan

NY Times reports that Obama administration is planning on letting businesses completely expense capital investments through 2011, rather than depreciate them. The reasoning is that this will encourage businesses, who are sitting on mountains of cash, to spend some of it on capital goods, thus creating demand and jobs.

It's the wrong idea. Here's why:

First of all, some businesses will just take the expense on stuff they were going to buy anyway, in order to make their bottom line look good. No stimulus there; just money lost from the Treasury. Granted, the money will come back later when the businesses can't use depreciation against their bottom line -- but that doesn't add any jobs.

Secondly, many businesses are going to buy things that are produced outside the country. This will generate demand and create jobs, all right -- just not here in the U.S. If the administration really wanted to create local jobs, they would include a demand that the goods be produced in the U.S.

Finally -- one of the items that counts as capital investment is software creation. When a company pays to have software systems built, it is gaining an asset. Therefore, this plan should create more demand for persons to build those systems. Guess where the bulk of those jobs will be? Yep -- overseas.

It looks to this writer as if the administration is trying to find a way to LOOK business-friendly and LOOK like it's doing something about the economy, without doing the one thing that would actually make a difference: a direct-to-jobs program like the WPA or CCC. Indirect investment in businesses, in hopes that they will in turn hire more people, is just more supply-side economics. And we all know how THAT turned out.